By Henry Hing Lee Chan

Shunde's Innovations

Shunde has abundant natural resources and has experience in
operating a cash-based agricultural economy. By improving and perfecting the
“mulberry-dyke and fish-pond model” for hundreds of
years, Shunde locals were knowledgeable about how the market economy runs and
understood the importance of efficiency and sustainability in running
businesses. In contrast to subsistence farmers, Shunde locals had extensive
experience working as artisans, workers and merchants—the
employment model that was a forerunner of work specialization in the modern
economy. The spirit of innovation and entrepreneurship was deeply ingrained in
the culture of the Shunde populace, and this awareness flourished after 1978.

The
“mulberry-dyke and fish-pond model” and today’s recycling economy

The mulberry-dyke and fish-pond model was a system designed
to maximize the potential of all production resources in the Pearl River Delta
region. It was environmentally friendly and very efficient in resource
utilization. Production steps involved digging deep fish ponds, elevating the
dyke surrounding the pond, planting mulberries along the dyke bases, and
farming freshwater fish in the pond.

The production cycle started from planting mulberry trees to
engaging in silkworm farming and ended with selling the fish raised from
feeding silkworm waste. An environmentally-friendly ecosystem with almost zero
waste between mulberry, silkworm and fish was created—the farmer
planted mulberry trees along the dyke and used the leaves to feed the
silkworms. Silkworm waste was fed to the fish, and after harvesting the fish,
the fish waste that had accumulated at the bottom of the pond was excavated and
used to strengthen the dyke base and served as fertilizer for the mulberry
trees. In this system, both silk and fish were the final products. The process
was a production chain and what happened at one stage affected the other
stages. It was therefore crucial to maintain efficiency at each stage and
manage the entire system holistically. A famous saying in the Pearl River Delta
summed up the relationship between organisms in the ecosystem: healthy mulberry
trees lead to healthy silkworms, healthy fishes, good-quality fertilizer, and
more silkworm cocoons. As the raw silk was an export commodity and its price
subject to global market fluctuations, the Shunde populace developed an early
knowledge of the global economy and the operation of the market. Fish was a
cash agricultural product and was sold to neighbouring cities. Hence the Shunde
populace also learnt about being a cash agricultural product trader.

A complete, scientific and self-sustaining pond community
with the mulberry trees, silkworm, fish, and mud forming a symbiotic
ecologically-friendly environment enhancing each other was established. The
system effectively prevented waterlogging of low areas as the pond is dredged after
the fish harvest and the soil was used to build up the dyke and provide
fertilizer to the mulberry trees along the embankment. All silkworm waste and
fish waste were used again in the system, eliminating environmental pollution.

The “mulberry fish pond” model was a forerunner of today’s
much-touted recycling and sustainable economy.

Development of the fish pond not only developed businesses
related to mulberry, silkworm and fish farming, it also drove silk-related
manufacturing businesses.

Figure 1.
Mulberry fish pond model

In the heyday of the silk industry at the turn of the 20th century, Shunde was a famous town for Guangdong’s economy. In 1922, its raw
silk production accounted for 97% of the total Pearl River Delta production and
80% of the province’s raw silk exports. However, during the Great Depression,
both price and sales plummeted, and by 1938 raw silk sales were only one-fifth
of 1922’s. The downturn reduced the size of the mulberry fish ponds
significantly, and other crops, mainly sugarcane, slowly replaced many mulberry
trees.

The mulberry fish ponds remained a significant agricultural
production model until the 1970s. The 1978 reform accelerated the decline of
the silk industry. The sericulture required intense labour input, a long
production cycle time, and carried higher risk, so most farmers gave it up and
shifted to work at TVEs following the industrialization. The remaining mulberry
fish ponds changed to fruit-based, flower-based, and sugarcane-based fish
ponds. These crops require much less labour input, and by now, most mulberry
fish ponds have disappeared in Shunde. After 1995, some ponds relocated to less
developed peripheral areas of the Pearl River Delta. However, the emphasis on
good management and the orientation towards the market economy learnt from
mulberry fish farming has become part of the entrepreneurial culture of the
Shunde people.

Figure 2. Mulberry-dyke and fish-pond

Economic
development model spearheaded by the Shunde government

Shunde has been an acknowledged leader in governance
innovation since the Chinese reform started. The county built its economy
around industrialization in the early 1980s, and its commitment to the
manufacturing industry has been steadfast. At different periods, the government
pioneered innovative measures befitting the prevailing economic environment to
promote economic growth. In the early days of reform, Shunde lacked funds,
skills and technology. (For more information, please refer to “Shunde and the
World Economy”). The government controlled almost all of the meagre production
resources, and its people had little resources of their own to venture into
productive endeavours. To jumpstart economic development, the government
adopted the developmental state model which was prevalent in East Asia. In this
model, the governments of the four Asian Tiger economies played the “innovative
leader” role in galvanizing the limited resources available and guiding the
upgrade and transformation of the economy.

At the start of the reform, the initial conditions for
industrialization present in Shunde were poor. The central and provincial
governments focused their industrial investment on Shunde’s neighbouring
provincial capital city, Guangzhou, which had an existing industrial base, while
foreign investment from Hong Kong and Macau flocked to Shenzhen’s Special
Economic Zone due to favourable policy. As an agricultural-based county that
was handicapped by a traditional socialist system that used the agricultural
surplus to support industrialization, the county could not generate enough
excess capital for industrial investment. The Shunde government had to adopt
innovative policies to solve this problem.

The
government’s innovative reform process

In the 1980s, the Shunde government adopted the
developmental state model. This model emphasized manufacturing and collective
ownership and encouraged hidden industry champions. In August 1978, the Shunde
government allowed Rongqi Town and Hong Kong Dajing Co., Ltd to jointly set up
the Dajin Clothing Factory (Rongqi Town and Guizhou Town were merged in 2000 to
form today’s Ronggui Town). Dajin Clothing Factory was one of China’s first
TVEs to engage in the compensation trade export model. (For more information,
please refer to “Shunde and the World Economy.”) The success of the model
enabled Shunde to become the leading “four tiger cubs of Guangdong”.

The “four tiger cubs of Guangdong” refer to Nanhai, Shunde,
Dongguan and Zhongshan. These four small and medium-sized counties in the Pearl
River Delta were the pioneers in China’s economic liberalization in the 1980s.

The four counties’ economies took off in the 1980s,
and the “tiger cub” nickname reflected their success and was comparable to the
then-popular four Asian tigers of Hong Kong, Singapore, South Korea and Taiwan,
although at a smaller scale. Each of the cubs had its economic model; Shunde,
Zhongshan and Nanhai’s models relied more on local entrepreneurs, while
Dongguan’s model relied more on overseas investment from Hong Kong, Macau and
Taiwan. All the models were based on the manufacturing industry and they had
contributed to the making of the Pearl River Delta in the 2000s as the factory
of the world. The four counties grew to become critical constituents of today’s
Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

Under the compensation trade export model, the foreign
partner provided funds, machinery, technology, management staff and raw
materials, while the Shunde partner provided the factory floor and labour. The
foreign partner bought all the finished products for export and paid the
factory rental and the labour component of the product to the local partner
after deducting the corresponding payment over the use of the equipment and
other capital input they provided. The compensation trade model relieved most
of the investment commitment from local Chinese partners sans labour and
factory space and allowed them to build up their industries at a period when
they could not raise enough funds to invest in industries. The Chinese provision
of labour input skillfully used the fact that labour at that time was extremely
cheap—only
about 10% of international standard and aplenty in China. In the case of land
and factory space, the Chinese just converted old factories or constructed
simple ones based on local materials. Again, not much investment was needed.

At the end of the contractual period in which the local
Chinese partner has settled all obligations to their foreign partners over the
use of their investment, the Chinese partners acquired all assets to become
independent TVEs.

Many TVEs adopted the compensation model (please refer to “Shunde
Economic Phenomenon” for more details), and Shunde resolved the problem over
the shortage of funds, skills and production technology that existed during the
earlier stage of reform. The local partners behind the TVEs were fast learners;
they not only learnt the production skills used in the production of the first
export products but also improved the process and earned the trust of overseas
customers. At the end of the cooperation period, they not only retained their
original export market but expanded it. The use of international export
standards as a production benchmark also gave them a leg ahead of domestic
Chinese competitors regarding quality. By the late 1980s, Shunde manufacturers
had carried an implicit seal of quality among Chinese consumers, and TVEs had
both the technical know-how and the management skills to expand in both the
Chinese domestic market and overseas market. Many TVEs changed their business
model from the compensation-trade to joint partner arrangements with foreign
partners. The larger TVEs could already export on their own and operate freely
without international partners.

The initial partners involved in the compensation trade
mostly came from Hong Kong and Macau and focused on light industry. The 1980s
TVE business and operational model helped Shunde integrate into the world
economy, and light industry remains a strong pillar of Shunde’s economy today.

To facilitate the growth of TVEs and help them in their
export drive, Shunde implemented a series of administrative reforms in the
1980s. The change devolved employee hiring power and wage policies to the
factory manager—a
departure from the socialist system that placed hiring power on bureaucrats and
stressed the wage equality of workers. The factory manager could use a
differentiated wage structure to pay his workers based on output and their
contributions to the company, and he could hire and fire a worker without any interference
from bureaucrats. While the abovementioned management prerogative of the
factory manager was a standard operating procedure (SOP) in the outside world
at that time, the policy was a first in China.

The Chinese economy in the early 1980s was in an initial
transition phase from a socialist economy to a market-based economy. A lot of
government policies were based on trial-and-error, and the famous quotation
“crossing the river by touching the stones” was used to describe the policy
environment. Some of the policies that came from the central government did not
properly address issues on the ground, and the Shunde government addressed this
mismatch by slightly twisting the original directive from the central and
provincial government. It creatively retained the spirit and policy objective
of the original directives while taking local conditions into account, thus
making those policies workable in the local setting. During that period, the
term “transformer” was used to describe the Shunde government: the central and
the provincial government is a power plant that sends out high voltage output,
and the local government acts as a transformer and lowers the input voltage to
make it suitable for local consumers. This transformer description demonstrated
the pragmatic spirit that Shunde’s local government adopted in reforms, and the
spirit of innovation was the secret recipe behind the success of the county
over the past forty years.

By being creative to pioneering in the compensation trade
model and putting in place complementary policies to support its success,
Shunde was the first to open the door to foreign investments in China. Shunde’s
reform and opening up was held in high esteem by the central government and it
was chosen by the government to pilot many new policies.

In 1992, Shunde was selected to pilot the Guangdong
Province’s comprehensive reform plan. Shunde seized this opportunity and became
the first in China to implement a comprehensive reform which focuses on TVE
property rights. The drive converted not only money-losing TVEs to private
ownership but also money-making ones.

Shunde was the first local government in China to implement
the privatization of collectively owned TVEs. The move generated some
controversy at the beginning but proved to be highly successful. The property
right reform, implemented in 1993, was named “靓女先嫁” in the local Cantonese
dialect and it meant to marry off the family’s beautiful daughter first. The
same strategy was used in the 1993 property rights reform, and TVEs and local
SOEs that had good management records and were profitable were the first to be
included in the reform. This policy was controversial when first introduced
because many believed that the change should just target the loss-making
companies.

However, the policy proved successful, and Shunde’s economy
continued to move into high gear. Many economists attributed its success in the
1990s and 2000s to the removal of the agency problem in TVEs when they were
privatized in 1993. After the privatization of well-managed TVEs and local
SOEs, management was incentivized to improve their business operations.

The success of the 1993 reform convinced many local
governments in China to also adopt the policy.

The property rights reform laid the foundation for Shunde’s
current private-business-led economy. In 2017, private businesses accounted for
nearly 80% of industrial output value and more than 90% of industrial output
growth. The dominance of domestic private manufacturers in the local economy is
a distinguishing feature of Shunde’s industrial landscape.

Shunde was
chosen to pilot the 1999 administrative modernization reform

In 1999, Shunde was selected as the pilot county to
experiment on administrative modernization reform. It reoriented the
government’s policy objectives from that of a regulator to a service-centric
type. The business-friendly environment helped the county become the top county
in China for four consecutive years (2000 to 2003). It was also the first
county whose GDP exceeded 100 billion yuan (2006).

Reform of
the government system

In 2009, under the premise of maintaining the organizational
structure, Shunde
District was
allowed to manage the economic, social, cultural and other aspects of the
prefecture-level city authority to carry out large-scale administrative reform.

Combining government functions to a smaller number of
departments was a vital part of the 2009 administrative reform. By redefining government functions and aggregating
similar tasks to fewer departments, administrative efficiency was improved.

Power over commerce, local taxation, food safety, land
usage, urban planning, public security, social security management and many
other areas were devolved from the provincial and municipal government to
Shunde’s district
government. In most areas relating to economic development, Shunde’s official
ranking was elevated from a district under the Foshan City government to that
of a county directly under the Guangdong provincial government.

In the reform, Shunde consolidated 41 party, government and
grassroots-government-funded non-administrative organizations into 16
departments. These 16 departments included six administration departments, five
economic departments, and five social service departments. This streamlining
process led Shunde government to
become the district government
with
the least number of departments in China. In November 2010, the government
department streamlining experience was promoted to 25 other counties by the
Guangdong Provincial Government.

Intensifying
the innovation drive to build a high-tech Shunde

The competitive advantage which Shunde enjoyed in the past
now faces challenges from newcomers who have imitated its model at a lower
cost. Using economies of scale to lower costs; building an ecosystem and an
efficient supply chain to offer innovative, cost-effective products; speeding
up technological innovation and improving product design are now insufficient
to sustain fast economic growth.

Moving into emerging high-value-added industries is the best
option for Shunde’s economic growth. However, this move is constrained by
problems such as insufficient innovation capability, shortage of relevant
talents and the fact that Shunde has little core technologies in emerging
high-value-added industries. To address the shortcomings, the Shunde government
developed a technological development plan called ‘Technology Shunde’. The
program is intended to work alongside the GBA project and develop Shunde’s
high-value-added emerging industries.

The Shunde government announced a series of measures aimed
at promoting innovation. The focus was on seven aspects: nurture high-tech
enterprises, build new R&D institutions, improve enterprise technology,
build incubators, develop core technologies in the targeted industries, build
up an innovative talent pool, and promote fintech.

In March 2016, the Shunde government established a Financial
Development Bureau to promote fintech, support promising new high-tech
start-ups and help emerging industries obtain finance for expansion. Kecan
Group, a venture capital holding company, was set up by the Shunde government
to invest in technology park construction and establish incubators to attract talents.
Kecan also set up incubators in Shenzhen with the aim of convincing successful
start-ups at the Shenzhen incubator to move to Shunde once their products have
reached the commercial production phase. Similarly, Kecan set up an office in
Beijing to attract successful start-ups to move to Shunde for their
manufacturing operations. A one-billion-yuan venture capital fund was set up by
Kecan to invest in promising start-ups in Shunde.

Shunde has fourteen innovation platforms under operation and
they can be classified into three groups. The first group comprises six
platforms related to servicing home appliances, furniture, horticulture, and
the garment and machinery industries. They provide business consultancy,
testing, design and training services to the industries.

The second group comprises five platforms in fundamental
research related to the industries. The district government has cooperated with
universities and research institutes to set them up, and they provide
postgraduate research training, conduct application-type research and focus on
adapting the research findings into production.

The last group comprises three incubator platforms for
innovative and entrepreneurial start-ups. Their businesses focus on forming
teams, project incubation, and technology-based coaching for the enterprises.

On top of the 14 platforms, Shunde has also been building
three important scientific and technological innovation clusters: the
Sino-German Industrial Service Zone, the Wisdom Valley of
Southern China, and the Shunde New High-Tech Industrial Development Zone. These
clusters are found in the south, east and southwest regions of Shunde
respectively. The Sino-German Industrial Service Zone is an intelligent
manufacturing industrial park; it focuses on smart manufacturing, robotics, and
modern exhibitions. The Wisdom
Valley of
Southern China is an area designed to attract company headquarters, talents, as
well as high-end R&D and service industries. The High-Tech Zone comes with
complete facilities and impressive ecological design and serves as a modern
industrial base for businesses.

Promoting high-value-added emerging industries is on the
to-do-list for
most GBA second-tier cities, and attractive financial incentives are offered to
attract successful companies to locate to their towns. For Shunde, the
government believes that aside from financial incentives, other non-economic
factors like providing conducive business and living environments are what
attracts talents and emerging industries. Some reforms have recently been
implemented to facilitate business operations and help outside talents relocate
to Shunde. An example is the
1121 Reform, which aims to create a conducive business environment
by streamlining business procedures and providing quality support services.

Shunde is known for implementing comprehensive plans to
attract talents and industries. The skill reflects Shunde’s creative spirit and
its ability to think out of the box, and is the hidden factor contributing to
its success.

Innovative management
of private companies

The rise of Shunde’s home appliances industry reflects the
entrepreneurial spirit and innovative ability of its private companies.
Entrepreneurs in the home appliances industry understand the company’s strength
and weakness, and their business model leverages on internal strength and
avoids pitfalls related to its shortcomings. They built large industry supply
chains, achieved economies of scale, and speedily incorporated the latest
product design and technology innovation in their products. Shunde’s home
appliances are known for being cost-effectiveness. But, most of the innovations in Shunde’s home appliance
industry are applied ones, few of them touch basic functions.

Shunde went through three industry evaluations in the past
12 years and is undisputedly the country’s home appliances capital. Since
China’s reform and opening, the industry has attracted more than 3,200 home
appliances and complementary companies using imitation, import and innovation.
It currently has an output value of over 200 billion yuan. There are 84 home
appliances companies with sales of over 100 million yuan, and 4 with sales of
over 10 billion yuan. These four companies include Midea, Hisense, Galanz and
Vanward. Additionally, 200
companies are among China’s top 500 corporations. In recent years, new emerging
stars such as Viomi and Deerma have surfaced, and GMCC and Sunwill have become
invisible industry champions.

Shunde’s home appliances industry currently has five national-level
technology centres and 21 provincial-level technology centres. It has the
highest number of national-level technology centres in the country and holds
one of the highest numbers of patents. By 2017, the industry includes more than
200 national high-tech companies.

Another feature of Shunde’s home appliances industry is that
many companies are willing to work in a niche area. Apart from large companies
like Midea, many companies sell a single range of products but have an output
value of 500 million to 1 billion yuan. The extent of specialization in the
home appliances industry
of Shunde is uncommon in China.

Branding also plays an indispensable role for Shunde’s home
appliances companies. After being named China’s home appliances capital again
in 2014, Shunde further implemented a movement to market its brand regionally
and internationally. There is no surprise that in 2018, Shunde was once again
crowned the home appliances capital. It has nine home appliances brand
classified as nationally famous brands, almost one-third of famous national
brands, 31
famous provincial brand and 57
well-known provincial brands.

Shunde’s trademark registration data fully reflects the emphasis on
brand innovation. Currently, the number of famous brands in the region, famous
brands in Guangdong Province, collective trademarks, and international
trademark applications in Madrid are 34, 143, 21 and 229 respectively. More
than 93,000 valid registered trademarks have been filed, and the district boasted an
average business trademark of 4,800 per ten thousand business entities, among
the highest in China.

The
challenge of continuing innovation

However, Shunde’s home appliances also face the problem of
continuing innovation challenges. Most of its innovations are application
innovations rather than entirely new product innovations or essential function
innovation. The industry is moving to address this issue by doing more basic
research, acquiring technology from overseas acquisition and moving into
complementary technology to search for a breakthrough.

In the context of fierce international competition brought
by the new industrial revolution and the challenges posed by other cities in
GBA following the closer integration of Pearl River Delta economy, Shunde’s
government will face new opportunities and challenges when trying to guide
private companies innovatively. Competitors from all around the world and the
GBA will be fighting for the same talents and companies, making the goal to
build a high-tech Shunde a more difficult one. Regarding opportunities,
however, cooperation in the GBA may be beneficial for Shunde’s industries as
Shunde can tap into the vast talent pool and business opportunities offered by
Shenzhen and Guangdong. A case in point is the relocation of DJI’s
manufacturing facility into Shunde. DJI is the largest civilian drone
manufacturer in the world, and it chose Shunde for its expansion.

The GBA integration presents both a challenge and an
opportunity to Shunde; as long as Shunde’s government and private companies
continue to innovate, the GBA will become an essential platform for Shunde’s
economic development.